October 13, 2020
GDP and GDP per capita are measures used to measure the size of an economy and the economic well being of people within that economy.
While not perfect measures, they are widely regarded as the best measures for measuring differences in standards of living and tracking those changes over time.
GDP can be used to compare the size of economies, while GDP per capita is a better measure of the well being of people within an economy.
The right panel displays the world’s 10 largest economies in 2017.
Clearly, having a large economy (GDP) is not the same as having a high standard of living (GDP per capita).
| Country | GDP (Millions of USD) | GDP per Capita (USD) |
|---|---|---|
| China | $19,887,033 | $14,344.42 |
| United States | $19,485,394 | $59,957.73 |
| India | $8,280,935 | $6,185.99 |
| Japan | $5,180,326 | $40,858.88 |
| Germany | $4,381,794 | $53,011.77 |
| Russian Federation | $3,818,781 | $26,005.98 |
| United Kingdom | $3,037,047 | $45,974.86 |
| Brazil | $3,017,716 | $14,519.85 |
| France | $2,997,297 | $44,826.51 |
| Indonesia | $2,894,126 | $10,935.84 |
The change in standards of living over time is best looked at by looking at the growth of GDP per capita.
The right panel displays US GDP per capita since 1947, and the shaded regions demarcate economic recessions.
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a year.
GDP per capita is simply GDP divided by a country’s population.
Let’s examine more closely at the underlined parts of the definition.
GDP measures total production. This raises a couple practical issues:
The solution to both of these issues is to denominate production in dollar terms, so we multiply the quantities of final goods and services by their market prices and add up these values.
Assume that the US economy produces 10 million automobiles and 2 billion pencils each year.
Next, assume that the average price of an automobile is $40,000 and the average price of a pencil is $0.10.
This implies that the market value of automobiles is \(10{,}000{,}000\times\$40{,}000=\$400{,}000{,}000{,}000\) and the market value of pencils is \(2{,}000{,}000{,}000\times\$0.10=\$200{,}000{,}000\).
Adding these together, the GDP generated from automobiles and pencils is \(\$400{,}000{,}000{,}000 + \$200{,}000{,}000 = \$400{,}200{,}000{,}000\)
Intermediate goods are sold to firms and then bundled or processed with other goods or services for sale at a later stage.
Final goods are the finished goods sold to final users and then consumed or held in personal inventories.
To avoid double-counting, only final goods are included in GDP.
Goods are tangible. e.g. cars, food, clothes.
Services are intangible. Transportation, haircuts, medical care.
Both are included in GDP
Since the 1950s, the portion of the economy created by services nearly doubled.
Most of that increase happened before the year 2000.
Since 2000, the shares of services, durable goods, and non durable goods has remained roughly constant.
Durable Goods – Goods that are expected to last for a year or more Nondurable Goods – Goods that are expected to be used up within a year
GDP only calculates what is produced, not what already exists. Thus:
GDP only includes production that takes place within the borders.
Examples:
Gross National Product (GNP) is a measure that looks at the nationality of the person doing the production, not the location of the production.
GDP is a flow measure of income:
This is contrast to a nation’s wealth:
Putting the definition back together:
Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a year.
GDP per capita is simply GDP divided by a country’s population.
Questions:
The growth rate of GDP tells us how rapidly a country’s production is rising or falling over time.
The formula for calculating the growth rate from year 1 to year 2 \(\frac{GDP_{y2}-GDP_{y1}}{GDP_{y1}}\)
For example, in 2004 US GDP was $11.7T and in 2005 it was $12.5T.
GDP growth was therefore \(\frac{\$12.5T-\$11.7T}{\$11.7T} = 6.8\%\)
If GDP in 1990 was $5.8 trillion and GDP in 1991 was $6.0 trillion, what was the growth rate of (nominal) GDP?
If GDP in 2008 was $14.4 trillion and GDP in 2009 was $13.9 trillion, what was the growth rate of (nominal) GDP?
Nominal variables, such as nominal GDP, have not been adjusted for changes in prices.
Real variables, such as real GDP, have been adjusted for changes in prices.
Economists usually are more interested in real GDP because increases in real GDP reflect increases in the standard of living.
Whenever one is looking at changes in a monetary variable over time, it is essential to use real variables
In 2005, Nominal GDP was $$12.4T in 1995, Nominal GDP was $7.4T
The Growth of Nominal GDP was therefore \(\frac{\$12.4T-\$7.4T}{\$7.4T} = 67.6\%\)
The problem with this calculation is that 2 things changed between 1995 and 2005:
Converting from nominal to real GDP eliminated the effect of the price change, so you are only measuring the increase in production.
2005 GDP was $12.4T, which was the amount of stuff produced in 2005 valued at 2005 prices.
1995 GDP was $7.4T, which was the amount of stuff produced in 1995 valued at 1995 prices.
What if we calculated 1995 GDP using 2005 prices instead?
1995 production valued at 2005 prices was $9.0T
Real GDP growth between 1995 and 2005, therefore, was \(\frac{\$12.4T-\$9.0T}{\$9.0T} = 37.8\%\)
Most economists would choose real GDP growth as the best single indicator of economic performance.
Real Growth per Capita is the best reflection of changing living standards.
To convert these prices to current prices, multiply by 6.06
To convert these prices to current prices, multiply by 2.74